Argument analysis: The problem when a pitfall opens

Posted Mon, April 21st, 2014 1:14 pm by Lyle Denniston

The Supreme Court spent most of a half-hour on Monday staying entirely away from a pitfall in the law that governs debt collection, but then that trap suddenly opened widely, and nearly swallowed the case of Republic of Argentina v. NML Capital Ltd. What made the difference? The Court began worrying a lot about the identity of the debtor — the sovereign nation of Argentina.

To a remarkable extent, this was an argument in which the front half and the second half did not seem to be on the same page. In the end, though, it appeared that the second part might well turn out to be controlling, and Argentina could get some special treatment as a debtor — because it is a nation, not an ordinary debtor.

If this case were about a defaulting debtor of the everyday kind, a court probably would be willing to let creditors go very far to discover whether the borrower was hiding its money or property, without asking whether the money was in a form that actually couldn’t be taken from it in the end — such as the debtor’s house. Those, it seems, are two different things legally: finding assets, then seizing them.

On Monday, a lawyer for Argentina, Jonathan L. Blackman of New York City, seemed to be making no headway trying to persuade the Court that the two were the same: if U.S. courts could not order Argentina to hand over some of its property to pay a debt, it could not order Argentina to identify that property and where it is kept.

With Justice Antonin Scalia leading the skeptics, it appeared that — with the likely exception of Justice Ruth Bader Ginsburg — the members of the Court were not willing to tie the ultimate question of whether some of Argentina’s assets are immune from being taken (an issue not before the Court now) to the question before the Court: what must Argentina reveal about its assets?

Justice Scalia, early on, phrased the issue this way: if a case was filed in New York against a “deadbeat property owner,” and the debtor was ordered to pay up, why couldn’t the creditor demand to know if there was property in Florida to go after? Of course, keeping the two steps separate, Scalia said, the creditor would then have to ask the Florida courts to “attach” that property; but why not let the creditor find out about it?

Blackman, of course, sought to head off that separation of the two steps, relying on the fact that Argentina is a sovereign nation and, as such, is protected by the Foreign Sovereign Immunities Act from having to surrender property outside the U.S. The Act, he insisted, treats discovery of information about property as an undivided part of the question of demanding that it be handed over.

The creditors who are holding bonds on which Argentina defaulted, Blackman said, are demanding to know what Argentina owns throughout the world, including its embassies, its military installations, and even the personal property of a former president. Since Argentina is immune from having to forfeit those assets, creditors can’t even ask about it.

Justice Stephen G. Breyer insisted that the law on foreign government immunity in U.S. courts says nothing at all about the “discovery” process — that is, asking about where Argentina may be hiding money or property.

If Argentina operated a butcher shop in Sicily, selling some of its famously savory beef, Breyer said, creditors should be allowed to find that out, and then go to that country to try to seize it under that country’s laws. Creditors, he said, could “not take a penny” in Sicily without showing their right to it under that country’s laws.

Blackman insisted that the lower courts’ orders requiring a “sweeping, worldwide forensic examination” of where Argentina holds property “far exceed[] the power of the United States courts.”

But, Justice Scalia told Blackman, if this was such a problem for sovereign governments, “I find it extraordinary that there is not a single brief from foreign countries; they file them all the time. Maybe Argentina owes them money.”

Blackman countered that it was not Argentina’s reputation as a debtor that was on the line, but the question of “even-handed treatment” of all foreign governments when they are seeking to protect their property holdings from the reach of U.S. courts.

Argentina’s lawyer was sharing his time with a federal government lawyer, Deputy U.S. Solicitor General Edwin S. Kneedler, who tried his best throughout his ten minutes to convince the Court that the case was all about government sovereignty, and the U.S. government would be “very troubled” if another country’s courts ordered it to tell foreign creditors about what the U.S. government owns around the world.

Other countries, he said, have approached the State Department to express their concerns about this case, he said. To that, Scalia retorted: “If this is as horrible as you say, we would have had some briefs [from them].”

Like Blackman, Kneedler contended that the immunities law only allows questions by creditors about property that a foreign nation held inside the U.S. and used for commercial activity there. Like Blackman, he was treating discovery and seizure as part of a continuum.

As Kneedler was about to finish, Justice Anthony M. Kennedy said “I thought I’d hear a lot about waiver.” He was referring to the fact that, when Argentina sold the now-defaulted bonds in U.S. markets, it included in the debt documents a sweeping forfeiture of its immunity from lawsuits. Up to that point Monday, the waiver issue had not come to the fore.

But that very issue would loom large in the second half of the argument, especially when Justice Kennedy brought it up again.

The holders of the defaulted Argentine bonds were represented in the case by Washington lawyer Theodore B. Olson, whose case for those clients is built upon the firm insistence that asking about Argentina’s assets does not bear upon what creditors could ultimately seize from that country, and that, in any event, Argentina’s waiver was a total surrender of legal immunity.

Justice Ginsburg pressed him on the first point, suggesting that she may have come close to being persuaded by Argentina’s argument that seizure and discovery are part of the same process.

And Ginsburg again stopped Olson when he argued that Argentina, at least in this instance, was no different from other debtors, and was no more immune from demands for information about assets that could be used to satisfy its debts. But, the Justice said, “this is a sovereign. It is immune except as to commercial activity in the United States.”

That exchange seemed to change the tone and thrust of the argument. Soon, Justice Sonia Sotomayor was expressing concern about the scope of the discovery orders issued against Argentina, saying that they swept very broadly. Olson tried to counter that the bondholders were only asking about banking transactions, commenting that Argentina had given creditors every reason to be suspicious that it was hiding its assets to keep them from being taken. “The banks are complying,” he said, adding that “the banks are not sovereigns.”

“But,” said Sotomayor, “you are asking for an accounting of everything that Argentina owns.” And Chief Justice John G. Roberts, Jr., added that the bondholders even wanted to know “how many jet fighters Argentina has.”

It was instantly clear that the argument had shifted entirely to the nature of the assets that Argentina was seeking to protect, and entirely away from the question of a legal right to ask about its property. Olson, trying to keep the two separate, argued that the creditors should be allowed to ask about everything Argentina owns.

But Justice Breyer then commented: “We could say no to that. Every subpoena has limits. When sovereignty is involved, a district court [judge] has to be more careful.” Breyer added that, perhaps, the judge should ask the State Department about how far a court order on probing into foreign government assets should go.

Olson tried to regain control of the argument, saying that a judge could always address specific objections about the scope of a discovery order, as the judge in this very case in fact did.

By that point, however, the substantive shift in the argument appeared complete, and even Justice Scalia expressed disbelief that the bondholders were claiming the right to demand information even about military and diplomatic assets.

Justice Kennedy picked up the new refrain, wondering why creditors would be defending a right to learn about military assets. The Court, the Justice said, was going to have to write a rule on how broadly the power of judges reached in such cases, and “what do we say to them?”

Olson again said that countries like Argentina could make specific objections to orders by such judges. But that response, it was apparent, was not working.

Soon, Justice Ginsburg was renewing her objection to the discovery order in this case, calling it an “omnibus order” which asks “what property Argentina has worldwide.”

When Olson tried for a last time to bring up Argentina’s waiver in the bond instruments, broad enough to allow for all forms of legal relief against that government, it was Justice Kennedy who moved to rebut that point. Three times, Kennedy asked whether Argentina had, in fact, accepted a waiver that went as far as exposing its military property, or its embassies overseas. Olson’s time expired as he tried to insist that the order under review was only asking about “bank transactions.” It seemed decidedly too little, too late.

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